Regression Discontinuity and
the Price Effects of Stock Market Indexing
Internet Appendix
Yen-Cheng Chang∗ Harrison Hong† Inessa Liskovich‡
In this Appendix we show results which were left out of the paper for brevity. In Section
1 we show the robustness of our main results. We report our estimates of the addition
and deletion effects using different bandwidths and specifications and we also show that our
assumption of random assignment is valid. In Section 2 we elaborate on the methodology
used to construct firm rankings on either side of the Russell 2000 cut-off and explain why
this is the correct approach. In Section 3 we describe the relative performance of funds
that we identified as indexers vs. liquidity providers by their responses to index additions
and deletions. Finally in Section 4 we show our estimates of the index addition and deletion
effects across the lower threshold of the Russell 2000 by using firms with market capitalization
rankings around 3000.
∗Shanghai Advanced Institute of Finance, Shanghai Jiao Tong University†Princeton University, NBER and CAFR‡Princeton University
1
1. Russell 1000 Cut-off
In this section we show that the RD estimates of the addition and deletion effect are not
sensitive to specifications. Our preferred specification in the paper used a local linear re-
gression and a bandwidth of 100 on either side of the cut-off. In Table A.1 we show those
results alongside results using local quadratic regressions and a bandwidth of 200. In all
cases June returns are positive and usually statistically significant. The magnitudes vary
from 2.2% to 11.0% for additions and from 4.4% to 5.4% for deletions. There is no evidence
of July reversals in any specification. The consistency of these results demonstrates that our
conclusions are robust to changes in the details of our regression discontinuity design.
In the paper we addressed the validity of our RD design, which requires that attributes
determined before the end-of-May ranking are smooth across the 1000 cut-off. This is nec-
essary for the assumption of local randomization inherent in any regression discontinuity
design. The smoothness of firm fundamentals around the cut-off is displayed graphically in
Figure A.1. Subfigures (a) and (b) show that there are no differences in returns between
firms that just made it into Russell 2000 and those that just missed in the month of May,
leading up to the June reconstitution. Likewise, there are no discontinuities in assets. There
appears to be slight break in assets for additions but it is not pronounced and insignificant
in the regressions reported in the paper. Therefore the RD is not driven by differences in
firm fundamentals that could be correlated with future returns.
2. Use of Appropriate Rankings
In this section we demonstrate the importance of using rankings based on May 31st market
capitalization rather than those based on June index weights. Rankings based on the June
index weights are inappropriate for two reasons. The first is that they incorporate June price
changes and the second is that they do not identify the firms that were almost included in
2
the Russell 2000 index.
Membership in the Russell 2000 index is determined according to a ranking of firms by
total market capitalization on May 31st. Once membership has been established, a different
measure of market capitalization is used to determine each firm’s weight within the index.
The number of a security’s shares is adjusted to reflect only those shares available to the
public. Shares held by another listed company, a government, or a large private individual,
and other types of restricted shares, are excluded.
Due to this share adjustment, a firm with high total market capitalization and a large
number of restricted shares could end up with a low weight in the Russell 1000. It is not
necessarily true that this firm was close to the cutoff for membership in the Russell 2000.
The RD design relies on comparing firms that were barely included in the index to those
that were barely excluded. If the firms with a low June ranking were not on the verge of
index inclusion, they are not an appropriate control group for included firms. This problem
is illustrated in Figure A.2, which shows the discontinuity in total May market capitalization
around the cutoff when using June rankings. Clearly the firms at the bottom of the Russell
1000 have much higher total market capitalization than the firms in the Russell 2000.
The other issue introduced by using June weights is that they are calculated using ad-
justed shares and end of June share prices. Therefore any excess returns in June are mechan-
ically incorporated into the rankings. The Russell 1000 firms with lowest returns in June will
migrate toward the bottom of their index whereas the Russell 2000 firms with the highest
June returns will move toward the top of their index. This creates a bias toward finding a
positive inclusion effect in June returns. This is evident in the large excess returns in June
shown in Table A.2. The estimates of the addition effect are around 15% and those of the
deletion effect are around 22%, both significantly higher than the estimates using end of May
rankings. Several specifications also show significant negative returns in May, demonstrat-
ing that firms on either side of the cutoff were different even before index reconstitution.
3
Tables A.3 and A.4 further highlight the differences between included and excluded firms
when using June rankings. Firms with the highest weights in the Russell 2000 index have
more institutional ownership, experience less turnover, and have more short interest than
the firms with the lowest weights in the Russell 1000 index. These differences are present
even before reconstitution. Consistent with the methodology of the share adjustment, the
Russell 2000 firms have much smaller market capitalization but more float shares.
3. Performance of Indexers and Liquidity Providers
In this section we study the outcomes of indexation by comparing the fund performance of
indexers and liquidity providers identified in Section 7.1 of the paper. We focus our analysis
on fund performance in June since we expect that indexer demand for market making is
concentrated right after Russell announces its annual constituents on May 31st.
Univariate comparisons (not reported for brevity) of June raw returns show that indexers
underperform liquidity providers by an average of 61 bps from 1996 to 2011. Consistent with
our prior, liquidity providers enjoy a premium in market making while indexers are forced
to purchase addition stocks and sell deletion stocks. To alleviate the concern that this
difference in performance is due to fund styles, we repeat the analysis using style-adjusted
returns. Every year we assign all funds in our database into one of 3-by-3 buckets using their
median MV and MtB in holdings. We use NYSE size breakpoints for size cutoffs, and MtBs
of all stocks in CRSP for value cutoffs. Style-adjusted returns are then June fund return
minus the average return of all funds in the same bucket. Using style-adjusted returns,
liquidity providers outperform indexers in June by 52 bps.
In Table A.5 we compare the performance of these two groups of funds using a regression
similar to Chen, Hong, Huang, and Kubik (2004). We restrict our sample to funds that are
either flagged as an indexer or a liquidity provider. The dependent variables are either raw
4
or style-adjusted June returns (in percentages). The independent variable is an indicator
that equals one if a fund is an indexer and zero if a fund is a liquidity provider. Control
variables are various lagged fund characteristics similar to Chen, Hong, Huang, and Kubik
(2004). In addition to the full sample (1996-2011), we also divide the sample into an earlier
(1996-2003) and a later sample period (2004-2011).
The full sample result reveals that indexers underperform liquidity providers in June
by 37.8 bps in raw returns and 43.9 bps in style-adjusted returns, all else equal. These
coefficients are both economically and statistically significant. The subsample results show
that the underperformance of indexers is larger in earlier periods. In the first half of the
sample, indexers underperform by 50 bps (62.4 bps) in raw (style-adjusted) returns. In the
second sample period, indexers underperform by 22.9 bps (23.4 bps) in raw (style-adjusted)
returns, roughly one-half to one-third of the difference in the earlier period. This pattern
is consistent with the results in Section 6 that show addition and deletion effects have been
declining.
4. Russell 3000 Cut-off
We repeat our main analysis for stocks around the lower cut-off of the Russell 2000; i.e.,
stocks ranked near the 3000 cut-off. Now our sample period is restricted to 2005 onwards
because the Russell 3000E, which includes roughly 4,000 stocks in the U.S. market and allows
us to identify the firm rankings around the lower cut-off, is not available until 2005. There
is also no banding around the lower cutoff, making it more straightforward to calculate the
cut-off point in every year. Figure A.3 plots the market capitalizations around the bottom
3000 cut-off. Notice that market capitalizations are smoothly declining across the cut-off,
supporting the assumption of random assignment.
5
4.1. Discontinuities in Index Weights
In Figure A.4 we show the weight changes that occur for additions and deletions across the
bottom 3000 cut-off. We find a modest change in index weights across the 3000 cut-off, in
contrast to the sizable changes across the 1000 cut-off. On average index weights change from
0.02 percentage points to 0 when a firm cross the 3000 cut-off and leaves the Russell 2000.
However even this smaller weight change is probably an over-estimate because the smallest
stocks in the Russell 2000 have so little weight in the index that they may be skipped over
by indexers. On the other hand, modest indexing changes for these small stocks may still
translate into meaningful price effects.
4.2. Regressions
As shown in Table A.6, we are able to closely match actual index addition and deletion
across the lower cut-off using our end of May rankings. The coefficient of actual addition
on estimated addition is 0.862 with a t-statistic of 48.86 and the R2 is 0.93. For deletion
the coefficient is 0.865 with a t-statistic of 39.79 and the R2 is 0.91. Table A.7 reports
the results of a fuzzy RD design for the addition and deletion effects using bandwidths of
100 and 200 and both linear and quadratic specification on either side of the cut-off. The
addition effect estimates are around 3%, which is not economically small. Yet the estimate
is only significant in one specification. Our interpretation is that we do not have enough
observations in the bottom cut-off to achieve a tight estimate.
We see a similar coefficients of around 3% for the deletion effect in June, although none of
these are statistically significant. What is interesting here is that we start getting significant
effects for July and September, with excess returns of around 0.055 and t-statistics of around
2 in our preferred specification. We also see a large reversal in August of -0.054, though this
coefficient is not significant. We attribute this bouncing around of estimates to a lack of
6
data. It might also be due to illiquidity in the bottom end of the index and the rebalancing
delay of indexers. The data limitations make any causative attribution difficult.
In Table A.8 we find no change in institutional ownership but do see a large response in
trading volume for firms that switched indices. Interestingly, there is a pronounced increase
in the short ratio following both addition and deletion. Perhaps this strong response in short
interest ratio around the bottom cut-off dampens some of the price effects of addition and
deletion. Manipulation by hedge funds is more of a concern for this experiment. We test for
differences in pre-reconstitution attributes in Table A.9 but find no evidence of discontinuities
in any measures.
7
Figure A.1: Validity Tests Around Upper Cut-off
Outcome variables are plotted against market capitalization ranking. The firms that end up in the Russell
1000 are on the left hand side of the cut-off. The firms that end up in the Russell 2000 are on the right hand
side. The sample period is from 1996 through 2012. The lines drawn fit linear functions of rank on either
side of the cut-off. Every point represents averages over all years and over 2 ranks.
(a) May Returns; Addition (b) May Returns; Deletion
(c) Assets; Addition (d) Assets; Deletion
8
Figure A.2: End-of-May Market Capitalization for end-of-June Rankings
End-of-May market capitalization is measured in billions of dollars and plotted against end-of-June rankings.
Firms that will end up in the Russell 1000 are on the left hand side of the cut-off and firms that will end up
in the Russell 2000 are on the right hand side. The sample period is from 1996 through 2006.
9
Figure A.3: End-of-May Market Capitalization Around Lower Cutoff
End-of-May market capitalization is measured in billions of dollars and plotted against end-of-May rankings.
Firms that will end up in the Russell 2000 are on the left hand side of the cut-off and firms that will be
deleted from the Russell 2000 are on the right hand side. The sample period is from 2005 through 2012.
10
Figure A.4: Index Weights Around Lower Cutoff for 2007 Index
Index weights are measured in percent of index (in percentage points) and plotted against end-of-May market
capitalization rankings. Figures (a) and (b) use firms that were outside of the Russell 3000 at the end of
May while figures (c) and (d) use firms that were in the Russell 2000 at the end of May. The firms that end
up in the Russell 2000 are on the left hand side of the cut-off. Those that end up outside of the Russell 2000
are on the right hand side.
(a) End-of-May Weights for Firms Outside Russell2000
(b) End-of-June Weights for Firms Starting OutsideRussell 2000
(c) End-of-May Weights for Firms in Russell 2000 (d) End-of-June Weights for Firms Starting in Rus-sell 2000
11
Table A.1: Returns Fuzzy RD
The table reports the results of a fuzzy RD design. For linear specification (p=1), the following equation isestimated:
Yit = β0l + β1l(rit − c) +Dit [β0r + β1r(rit − c)] + εit.
For quadratic specification (p=2), the following equation is estimated:
Yit = β0l + β1l(rit − c) + β2l(rit − c)2 +Dit
[β0r + β1r(rit − c) + β2r(rit − c)2
]+ εit.
The outcome variable is monthly stock returns and the independent variable is an indicator for addition to(or staying in) the Russell 2000 index. Monthly returns are shown for the month immediately preceding theindex rebalancing (June) and for four months after. We show coefficient estimates of β0r and t-statistics arereported in parentheses. Results are shown for two different bandwidths choices: 100, and 200. Only firmsthat were members of the Russell 1000 index at the end of May are used for addition. Only those that weremembers of the Russell 2000 at the end of May are used for deletion. The sample period is 1996-2012.
* p<0.05, ** p<0.01, *** p<0.001
Addition Effect: Bandwidth = 100
May Jun Jul Aug Sepp=1 -0.003 0.050∗∗ -0.003 0.035 -0.021
(-0.14) (2.65) (-0.11) (1.59) (-0.89)p=2 -0.029 0.110∗∗ 0.085 -0.016 0.014
(-0.68) (2.73) (1.78) (-0.35) (0.29)N 1055 1057 1053 1052 1047
Addition Effect: Bandwidth = 200
May Jun Jul Aug Sepp=1 -0.012 0.022 -0.000 0.027 -0.015
(-0.92) (1.84) (-0.02) (1.88) (-1.08)p=2 -0.011 0.060∗∗ 0.001 0.013 -0.023
(-0.47) (2.86) (0.05) (0.55) (-0.89)N 2253 2255 2245 2231 2222
Deletion Effect: Bandwidth = 100
May Jun Jul Aug Sepp=1 0.005 0.054∗∗ -0.019 -0.002 0.011
(0.32) (3.00) (-0.96) (-0.09) (0.53)p=2 -0.027 0.052 0.025 -0.000 0.019
(-0.81) (1.48) (0.60) (-0.00) (0.44)N 1546 1545 1533 1526 1519
Deletion Effect: Bandwidth = 200
May Jun Jul Aug Sepp=1 0.010 0.044∗∗∗ -0.024 -0.004 0.010
(0.94) (3.97) (-1.90) (-0.33) (0.77)p=2 0.007 0.053∗∗ -0.014 0.003 0.005
(0.37) (2.61) (-0.60) (0.14) (0.20)N 3027 3026 3003 2984 2974
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Table A.2: Returns Sharp RD Using June Rankings
The table reports the results of a sharp RD design. For linear specification (p=1), the following equation isestimated:
Yit = β0l + β1l(rit − c) +Dit [β0r + β1r(rit − c)] + εit.
For quadratic specification (p=2), the following equation is estimated:
Yit = β0l + β1l(rit − c) + β2l(rit − c)2 +Dit
[β0r + β1r(rit − c) + β2r(rit − c)2
]+ εit.
The outcome variable is monthlystock returns and the independent variable D is an indicator for membershipin the Russell 2000 index. Ranking rit is imputed from June index weights and is above cut-off c when D = 1.We show coefficient estimates of β0r and t-statistics are reported in parentheses. Results are shown for twodifferent bandwidths choices: 100, and 200. The regression identifying the addition effect only uses firmsthat were in the Russell 1000 at the end of May. The regression identifying the deletion effect only usesthose that were members of the Russell 2000 at the end of May. The sample period is 1996-2012.
* p<0.05, ** p<0.01, *** p<0.001
Addition Effect: Bandwidth = 100
May Jun Jul Aug Sepp=1 -0.008 0.137∗∗∗ -0.024 0.022 0.016
(-0.39) (7.98) (-1.16) (1.05) (0.80)p=2 -0.012 0.188∗∗∗ -0.060 0.047 0.003
(-0.37) (6.37) (-1.83) (1.24) (0.10)N 935 938 929 925 928
Addition Effect: Bandwidth = 200
May Jun Jul Aug Sepp=1 0.004 0.136∗∗∗ -0.020 0.006 0.006
(0.30) (10.94) (-1.41) (0.45) (0.44)p=2 -0.007 0.154∗∗∗ -0.037 0.023 0.005
(-0.33) (8.16) (-1.69) (1.00) (0.24)N 1814 1815 1802 1805 1800
Deletion Effect: Bandwidth = 100
May Jun Jul Aug Sepp=1 -0.040∗ 0.217∗∗∗ 0.000 0.018 0.002
(-2.01) (7.63) (0.02) (0.84) (0.09)p=2 -0.052 0.280∗∗∗ -0.020 0.002 0.055
(-1.84) (5.96) (-0.70) (0.08) (1.66)N 1062 1060 1056 1059 1058
Deletion Effect: Bandwidth = 200
May Jun Jul Aug Sepp=1 -0.020 0.193∗∗∗ -0.008 0.025 0.000
(-1.47) (11.44) (-0.61) (1.78) (0.02)p=2 -0.045∗ 0.228∗∗∗ 0.012 0.019 0.017
(-2.18) (7.61) (0.60) (0.87) (0.72)N 2303 2303 2288 2292 2295
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Table A.3: Other Outcome Variables Using June Rankings
The table reports the results of a fuzzy RD design. The following equation is estimated.
Yit = β0l + β1l(rit − c) +Dit [β0r + β1r(rit − c)] + εit.
The independent variable D is an indicator for membership in the Russell 2000 index. Ranking rit is imputedfrom June index weights and is above cut-off c when D = 1. We show coefficient estimates of β0r and t-statistics are reported in parentheses. The bandwidth is 100. The regression identifying the addition effectonly uses firms that were in the Russell 1000 at the end of May. The regression identifying the deletioneffect only uses those that were members of the Russell 2000 at the end of May. VR is volume ratio. IO isinstitutional ownership and is measured quarterly. The sample period is 1996-2012.
* p<0.05, ** p<0.01, *** p<0.001
Addition Effect
May Jun Jul Aug SepVR -0.177∗ 0.108 0.031 -0.151 -0.084
(-2.22) (0.91) (0.41) (-1.69) (-0.98)
IO 0.313∗∗∗ 0.283∗∗∗
(8.14) (6.06)N 878 879 871 864 866
Deletion Effect
May Jun Jul Aug SepVR -0.063 -0.230 -0.404 0.060 0.079
(-0.32) (-1.69) (-1.77) (0.71) (0.96)
IO 0.375∗∗∗ 0.381∗∗∗
(9.68) (10.44)N 951 954 948 952 957
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Table A.4: Validity Tests for June Rankings
The table reports the results of a fuzzy RD design. The following equation is estimated.
Yit = β0l + β1l(rit − c) +Dit [β0r + β1r(rit − c)] + εit.
The independent variable D is an indicator for membership in the Russell 2000 index. Ranking rit is imputedfrom June index weights and is above cut-off c when D = 1. We show coefficient estimates of β0r and t-statistics are reported in parentheses. The bandwidth is 100. The regression identifying the addition effectonly uses firms that were in the Russell 1000 at the end of May. The regression identifying the deletioneffect only uses those that were members of the Russell 2000 at the end of May. The data on fundamentalvariables is annual so estimates cannot be reported separately for each month. Mktcap is in billions ofdollars. Repurchase is an indicator for repurchase activity in that fiscal year. ROE and ROA are return onequity and return on assets. EPS is earnings per share, excluding extraordinary items. Assets is asset bookvalue in millions of dollars. C/A is the cash to asset ratio. ICR is the interest coverage ratio. Float is thenumber of floating shares (in thousands). The sample period is 1996-2012.
* p<0.05, ** p<0.01, *** p<0.001
Addition Effect
Mktcap Repurchase ROE ROA EPS Assets ICR C/A Float-1.42∗∗∗ .342∗∗∗ .821 -.00335 -1.05∗∗ -3,257∗∗∗ 21.4 -.0217 49,233∗∗∗
(-10.71) (3.86) (0.96) (-0.15) (-2.85) (-3.33) (0.55) (-1.25) (5.72)N 938 661 786 786 785 787 677 751 938
Deletion Effect
Mktcap Repurchase ROE ROA EPS Assets ICR C/A Float-.336∗∗∗ -.0725 .25 .000583 -.0725 -1,180 -21.7 .0468∗ 32,169∗∗∗
(-5.37) (-0.58) (0.55) (0.03) (-0.17) (-1.78) (-0.43) (2.32) (7.24)N 1059 619 762 762 761 762 668 754 1059
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Table A.5: Fund Performance of Indexers and Liquidity Providers
This table reports OLS regression results of fund returns on fund characteristics. We restrict the sample to
funds that are either flagged as an indexer or a liquidity provider. The dependent variable is June raw or
style-adjusted fund returns (in percentages). Monthly style benchmark returns are the average of all fund
returns with the same size/value assignment. The Index Dummy equals one if a fund is an indexer and
zero if it is a liquidity provider. Log(MV) and Log(MtB) are the log of median market capitalization and
market-to-book of fund holdings, measured annually using the latest report date from April of year t− 1 to
March of year t. MtB is winsorized by dropping at 99.75% and assumes a five months lag in book value.
Log(TNA), Log(1+ FAM TNA), Turn, Age, Exp Ratio, Flow, and Lagged Returns are a fund’s lagged
log total net assets (in millions), log fund family total net assets, turnover, age, expense ratio, total load,
percentage of new fund flow over past 12 months, and cumulative fund return over past 12 months. T-stats
are in reported in parentheses. The sample period is 1996-2011.
* p<0.05, ** p<0.01, *** p<0.001
All 1996-2003 2004-2011Raw Adjusted Raw Adjusted Raw Adjusted
Index Dummy -0.378∗ -0.439∗∗ -0.500 -0.624∗ -0.229 -0.234(-2.58) (-2.98) (-1.94) (-2.39) (-1.72) (-1.82)
Log(TNA) 0.00936 -0.0285 0.0617 0.00151 -0.0481 -0.0675(0.18) (-0.54) (0.61) (0.01) (-1.14) (-1.64)
Log(1 + FAM TNA) -0.0298 0.000315 -0.0544 -0.00921 -0.00926 0.00794(-0.99) (0.01) (-0.94) (-0.15) (-0.35) (0.30)
Turn 0.0141 0.0343 0.0600 0.0792 -0.0418 -0.0151(0.27) (0.63) (0.56) (0.73) (-0.82) (-0.28)
Age -0.000104 0.00136 -0.00402 -0.00325 0.00672 0.00817(-0.01) (0.12) (-0.21) (-0.14) (0.85) (0.95)
Exp Ratio 20.65 21.85 40.91 38.84 -5.381 -1.952(1.16) (1.21) (1.42) (1.32) (-0.33) (-0.12)
Load -2.659 -3.049 -4.138 -4.620 -0.967 -1.335(-1.41) (-1.63) (-1.28) (-1.44) (-0.59) (-0.81)
Flow -0.0300∗∗∗ -0.0132∗ -0.0369∗∗∗ -0.0193∗∗ 0.121 0.107(-4.10) (-1.97) (-4.12) (-2.79) (1.75) (1.43)
Lagged Returns 0.0886∗∗∗ 0.0757∗∗∗ 0.0959∗∗∗ 0.0815∗∗∗ 0.0492∗∗∗ 0.0439∗∗∗
(10.54) (8.37) (9.76) (7.71) (4.48) (4.00)N 1157 1157 573 573 584 584adj. R2 0.757 0.185 0.708 0.202 0.847 0.122
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Table A.6: First Stage of Fuzzy RD
The table reports the first stage regression from a fuzzy RD design. The following equation is estimated.
Dit = α0l + α1l(rit − c) + τit [α0r + α1r(rit − c)] + εit
The outcome variable D is an indicator for addition to the Russell 2000 index. The variable τ is an indicatorfor whether the firm’s end-of-May market capitalization ranking rit predicted addition to the Russell 2000index. We show coefficient estimates of α0r and t-statistics are reported in parentheses. All regressions usefirms with end-of-May ranking within 100 spots of the predicted cut-off c. The regression identifying theaddition effect only uses firms that were in the Russell 1000 at the end of May. The regression identifyingthe deletion effect only uses firms that were members of the Russell 2000 at the end of May. The sampleperiod is 2005-2012.
* p<0.05, ** p<0.01, *** p<0.001
Addition Effect Deletion Effectτ 0.862∗∗∗ 0.865∗∗∗
(48.86) (39.79)N 837 771adj. R2 0.933 0.910F 3,896 2,601
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Table A.7: Lower Cut-off Returns
The table reports the results of a fuzzy RD design. For linear specification (p=1), the following equation isestimated:
Yit = β0l + β1l(rit − c) +Dit [β0r + β1r(rit − c)] + εit.
For quadratic specification (p=2), the following equation is estimated:
Yit = β0l + β1l(rit − c) + β2l(rit − c)2 +Dit
[β0r + β1r(rit − c) + β2r(rit − c)2
]+ εit.
The outcome variable is monthly stock returns and the independent variable D is an indicator for membershipin the Russell 2000 index. An indicator for whether ranking rit is above the cut-off c is used as an instrumentfor D. We show coefficient estimates of β0r and t-statistics are reported in parentheses. The results showtwo different bandwidth choices: 100 and 200. The regression identifying the addition effect only uses firmsthat outside of the Russell 2000 at the end of May. The regression identifying the deletion effect only usesthose that were members of the Russell 2000 at the end of May. The sample period is 2005-2012.
* p<0.05, ** p<0.01, *** p<0.001
Addition Effect: Bandwidth = 100
May Jun Jul Aug Sepp=1 -0.034 0.036 0.022 -0.031 0.029
(-1.09) (1.45) (1.02) (-1.29) (1.25)p=2 -0.024 0.042 0.001 -0.025 0.021
(-0.45) (0.94) (0.03) (-0.58) (0.56)N 822 835 829 823 813
Addition Effect: Bandwidth = 200
May Jun Jul Aug Sepp=1 -0.011 0.037∗ 0.009 -0.020 0.031
(-0.54) (2.15) (0.59) (-1.27) (1.90)p=2 -0.060 0.025 0.020 -0.048 0.026
(-1.78) (0.94) (0.88) (-1.85) (1.02)N 1657 1676 1669 1658 1645
Deletion Effect: Bandwidth = 100
May Jun Jul Aug Sepp=1 0.015 0.033 0.058∗ -0.054 0.055∗
(0.52) (1.25) (1.97) (-1.82) (2.00)p=2 0.012 0.034 0.055 -0.033 0.062
(0.29) (0.74) (1.03) (-0.72) (1.32)N 770 771 766 765 764
Deletion Effect: Bandwidth = 200
May Jun Jul Aug Sepp=1 0.022 0.027 0.006 -0.036 0.037∗
(1.09) (1.50) (0.29) (-1.87) (1.99)p=2 0.027 0.001 0.055 -0.030 0.034
(0.86) (0.02) (1.73) (-0.95) (1.11)N 1527 1528 1518 1516 1513
18
Table A.8: Lower Cut-off Outcome Variables
The table reports the results of a fuzzy RD design. The following equation is estimated.
Yit = β0l + β1l(rit − c) +Dit [β0r + β1r(rit − c)] + εit.
The independent variable D is an indicator for membership in the Russell 2000 index. An indicator forwhether ranking rit is above the cut-off c is used as an instrument for D. We show coefficient estimatesof β0r and t-statistics are reported in parentheses. The bandwidth is 100. The regression identifying theaddition effect only uses firms that were outside of the Russell 2000 at the end of May. The regressionidentifying the deletion effect only uses those that were members of the Russell 2000 at the end of May. VRis volume ratio. IO is institutional ownership and is measured quarterly. The sample period is 2005-2012.
* p<0.05, ** p<0.01, *** p<0.001
Addition Effect
May Jun Jul Aug SepVR -0.750 3.332∗∗∗ 0.332∗∗ 0.091 -0.231
(-1.86) (7.02) (2.91) (0.62) (-1.01)
IO 0.012 0.009(0.30) (0.22)
N 496 502 499 495 489
Deletion Effect
May Jun Jul Aug SepVR -0.093 -1.530∗∗∗ 0.196 0.046 0.406∗∗∗
(-0.78) (-6.00) (1.96) (0.36) (3.72)
IO 0.031 0.041(0.78) (1.04)
N 581 580 577 575 574
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Table A.9: Lower Cut-off Validity Tests
The table reports the results of a fuzzy RD design. The following equation is estimated.
Yit = β0l + β1l(rit − c) +Dit [β0r + β1r(rit − c)] + εit.
The independent variable D is an indicator for membership in the Russell 2000 index. An indicator forwhether ranking rit is above the cut-off c is used as an instrument for D. We report coefficient estimatesof β0r and t-statistics are reported in parentheses. The bandwidth is 100. The regression identifying theaddition effect only uses firms that were outside of the Russell 2000 at the end of May. The regressionidentifying the deletion effect only uses those that were members of the Russell 2000 at the end of May. Thedata on fundamental variables is annual so estimates cannot be reported separately for each month. Mktcapis in billions of dollars. Repurchase is an indicator for repurchase activity in that fiscal year. ROE and ROAare return on equity and return on assets. EPS is earnings per share, excluding extraordinary items. Assetsis asset book value in millions of dollars. C/A is the cash to asset ratio. ICR is the interest coverage ratio.The sample period is 2005-2012.
* p<0.05, ** p<0.01, *** p<0.001
Addition Effect
Mktcap Repurchase ROE ROA EPS Assets ICR C/A0.013 0.090 0.196 0.001 0.033 -43.161 -159.180 0.061(1.44) (0.78) (0.84) (0.02) (0.11) (-0.37) (-1.57) (1.57)
N 837 357 396 396 395 396 315 393
Deletion Effect
Mktcap Repurchase ROE ROA EPS Assets ICR C/A-0.011 0.094 0.126 -0.012 -0.400 -49.995 24.090 0.030(-1.06) (0.90) (0.83) (-0.27) (-1.14) (-0.34) (0.03) (0.87)
N 771 458 501 501 500 502 394 494
20